Delta Rebuffs Improved US Airways Bid

The merger plot just thickened at Delta Air Lines.

US Airways bumped up its takeover bid for the Atlanta-based airline by 20 percent Wednesday, to $10.3 billion, adding a Feb. 1 deadline in a move to pressure Delta's bankruptcy court creditors --- who have a big say in whether the deal goes through.

Industry analysts said that Delta should give Tempe, Ariz.-based US Airways a better shot at persuading the creditors to choose its hostile takeover bid over Delta management's plan to emerge from Chapter 11 as an independent carrier.

But a report also surfaced that Atlanta-based Delta and Northwest Airlines, also in Chapter 11 proceedings, have had talks about a possible merger after they both exit bankruptcy.

Citing unidentified sources, the Wall Street Journal reported that the two airlines were talking at various levels of management.

It said Delta and its creditors may see a post-bankruptcy link-up with Northwest as a better alternative to the US Airways bid. The Journal also said Delta and United Airlines have had contacts.

A merger involving Delta and any of those possible partners would create the world's biggest airline. It would require approval of the U.S. Justice Department, which historically has taken a dim view of such large-scale deals.

Delta declined to comment on the report. It could be holding limited talks with other carriers as part of its obligation to creditors. Under bankruptcy law, Delta's management has an obligation to creditors, the ultimate owners of the reorganizing company, to seriously examine options.

Delta executives have rebuffed the US Airways bid --- first launched in November --- and insist they want to bring the airline out of Chapter 11 on its own. But they have not ruled out later deals. Indeed, CEO Gerald Grinstein has long predicted an eventual industry consolidation.

Delta said in a statement that its board will review the revised US Airways offer. But it added: "On its face, the revised proposal does not address significant concerns that have been raised about the initial US Airways proposal and, in fact, would increase the debt burden of the combined company by yet another $1 billion."

Still, the sweetened US Airways offer and the reported talks with Northwest propelled speculation that Delta will ultimately find itself in a deal.

"Delta was in play before," Anthony Sabino, professor of law and business at St. John's University in New York, said in an e-mail. "Now it's really up for grabs." Sabino predicted US Airways may raise its bid again, perhaps to $11 billion.

"Jerry Grinstein is not getting much sleep these days. He's thinking 'Doug Parker (US Airways CEO) is after me. Who else is going to call?' " said Sabino.

US Airways' fattened offer includes $5 billion in cash to creditors and 89.5 million shares in the merged airline, up from $4 billion cash and 78.5 million shares initially. That boosted the offer's market value to $10.3 billion, from $8.5 billion.

Delta's stand-alone reorganization plan, filed last month, calls for creditors to get stock in the reorganized company, which it says would be worth up to $12 billion. Some analysts have predicted Delta will have to add a cash payment to its plan.

Calyon Securities analyst Ray Neidl said US Airways boosted its odds that it will succeed from 40 percent to 50 percent, saying the new bid will be "very attractive" to creditors.

But creditors still have to worry that the Justice Department may block the merger, he noted. That would not only kill the deal but also could delay Delta's Chapter 11 exit.

The idea of a post-bankruptcy merger of Delta and Northwest "sounds credible," said Neidl. He said it would probably result in Delta's management remaining in charge.

That would negate at least some of the opposition among Delta workers to a US Airways deal, in which the Arizona carrier would be expected to run the new airline and call the shots on the headquarters location.

Neidl also said he thinks a Delta-Northwest deal would pass Justice scrutiny more easily because the two carriers have less route overlap.

But Parker made it clear US Airways isn't giving up.

"Simply stated, it is time for the process to move forward," Parker said in a conference call Wednesday.

He said he expects Delta creditors will agree to support the initial steps of a merger, such as beginning so-called "due diligence" of the proposed combination and asking federal regulators to begin an antitrust review, by the Feb. 1 deadline.

Parker, in an interview with the Atlanta Journal Constitution nine days ago, said, "We don't feel any need to amend the [initial] offer."

He said Wednesday that his airline decided to raise the offer after "more conversations with creditors," including a meeting Monday with retired Continental Airlines CEO Gordon Bethune, recently hired by Delta's unsecured creditors committee to help it evaluate the US Airways bid vs. Delta's stand-alone plan.

Bethune presented his report to the committee Wednesday.

"It was quite clear as we had more conversations that they ... didn't see as clearly as we did that our proposal had so much more value that it justified the risk of going forward with us," Parker said. "We came to the conclusion that we should make the decision much, much easier for them."

Delta's unsecured creditors committee --- which includes big suppliers, banks and the carrier's pilots' union --- is a key player in determining the outcome of the takeover bid and is quietly evaluating both Delta's stand-alone plan and the US Airways offer.

The committee hasn't given a public reaction to the merger offer so far. Leaders of Delta's pilots' union oppose it.

"We're 100 percent focused on killing this US Airways hostile merger," union chief Lee Moak said Wednesday. He declined to even address the reported talks with Northwest. "Our goal is to emerge from bankruptcy as a stand-alone carrier. We're not even considering anything else."

Staff writer Dave Hirschman contributed to this article.

The Two Plans: Merger vs. Solo

US Airways' revised proposal:

* Worth about $10.3 billion, up 20 percent from first offer

* Delta's creditors get stock in merged company, plus $5 billion in cash

* Has Feb. 1 deadline for creditors to indicate support for initial steps toward pursuing a deal

* US Airways and Delta would integrate operations, generating $1.65 billion in savings or revenue via 'synergies'

* Merged airline called Delta, but US Airways' top management in charge

* Doesn't say where headquarters would be located

* Antitrust clearance by Department of Justice is required

Delta's plan

* Values company at $9.4 billion to $12 billion

* Sees Chapter 11 exit in mid-2007

* Creditors get newly issued stock for their claims, but no upfront cash at this point

* Current stock wiped out

* Exit financing to be negotiated

* Forecasts profits with existing strategy

* Delta remains Atlanta-based



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